What CEOs can learn from Sherlock Holmes

How do we make sure we don’t fall victim to overly confident thinking, thinking that forgets to challenge itself on a regular basis? No method is foolproof. In fact, thinking it foolproof is the very thing that might trip us up.

Because our habits have become invisible to us, because we are no longer learning actively and it doesn’t seem nearly as hard to think well as it once did, we tend to forget how difficult the process once was. We take for granted the very thing we should value. We think we’ve got it all under control, that our habits are still mindful, our brains still active, our minds still constantly learning and challenged—especially since we’ve worked so hard to get there—but we have instead replaced one, albeit far better, set of habits with another. In doing so we run the risk of falling prey to those two great slayers of success: complacency and overconfidence.

These are powerful enemies indeed. Even to someone like Sherlock Holmes. Consider for a moment “The Yellow Face,” one of the rare cases where Holmes’s theories turn out to be completely wrong. In the story, a man named Grant Munro approaches Holmes to uncover the cause of his wife’s bizarre behavior. A cottage on the Munros’ property has recently acquired new tenants, and strange ones at that. Mr. Munro glimpses one of its occupants and remarks that “there was something unnatural and inhuman about the face.” The very sight of it chills him.

But even more surprising than the mystery tenants is his wife’s response to their arrival. She leaves the house in the middle of the night, lying about her departure, and then visits the cottage the next day, extracting a promise from her husband that he will not try to pursue her inside. When she goes a third time, Munro follows, only to find the place deserted. But in the same room where he earlier saw the chilling face, he finds a photograph of his wife.

What ever is going on? “There’s blackmail in it, or I am much mistaken,” proclaims Holmes. And the blackmailer? “The creature who lives in the only comfortable room in the place and has her photograph above his fireplace. Upon my word, Watson, there is something very attractive about that livid face at the window, and I would not have missed the case for worlds.”

Watson is intrigued at these tidbits. “You have a theory, then?” he asks.

“Yes, a provisional one,” Holmes is quick to reply. “But,” he adds, “I shall be surprised if it does not turn out to be correct. This woman’s first husband is in that cottage.”

But this provisional theory proves incorrect. The occupant of the cottage is not Mrs. Munro’s first husband at all, but her daughter, a daughter of whose existence neither Mr. Munro nor Holmes had any prior knowledge. What had appeared to be blackmail is instead simply the money that enabled the daughter and the nanny to make the passage from America to England. And the face that had seemed so unnatural and inhuman was that way because it was, indeed, just that. It was a mask, designed to hide the little girl’s black skin. In short, Holmes’s wonderings have ended up far from the truth. How could the great detective have gone so wrong?

Confidence in ourselves and in our skills allows us to push our limits and achieve more than we otherwise would, to try even those borderline cases where a less confident person would bow out. A bit of excess confidence doesn’t hurt; a little bit of above-average sensation can go a long way toward our psychological well-being and even our effectiveness at problem solving. When we’re more confident, we take on tougher problems than we otherwise might. We push ourselves beyond our comfort zone. But there can be such a thing as being too certain of yourself: overconfidence, when confidence trumps accuracy. We become more confident of our abilities, or of our abilities as compared with others’, than we should be, given the circumstances and the reality. The illusion of validity grows ever stronger, the temptation to do things as you do ever more tempting. This surplus of belief in ourselves can lead to unpleasant results — like being so incredibly wrong about a case when you are usually so incredibly right, thinking a daughter is a husband, or a loving mother, a blackmailed wife.

It happens to the best of us. In fact, it happens more to the best of us. Studies have shown that with experience, overconfidence increases instead of decreases. The more you know and the better you are in reality, the more likely you are to overestimate your own ability—and underestimate the force of events beyond your control. In one study, CEOs were shown to become more overconfident as they gained mergers and acquisitions experience: Their estimates of a deal’s value become overly optimistic (something not seen in earlier deals). In another, in contributions to pension plans, overconfidence correlated with age and education, such that the most overconfident contributors were highly educated males nearing retirement. In research from the University of Vienna, individuals were found to be, in general, not overconfident in their risky asset trades in an experimental market—until, that is, they obtained significant experience with the market in question. Then levels of overconfidence rose apace. What’s more, analysts who have been more accurate at predicting earnings in the prior four quarters have been shown to be less accurate in subsequent earnings predictions, and professional traders tend to have a higher degree of overconfidence than students. In fact, one of the best predictors of overconfidence is power, which tends to come with time and experience.

Success breeds overconfidence like nothing else. When we are nearly always right, how far is it to saying that we’ll always be right? Holmes has every reason to be confident. He is almost invariably correct, almost invariably better than anyone else at almost everything, be it thinking, solving crimes, playing the violin, or wrestling. And so, he should rightly fall victim to overconfidence oft en. His saving grace, however, or what is usually his saving grace, is precisely that he knows the pitfalls of his mental stature and fights to avoid them by following his strict thought guidelines, realizing that he needs to always keep learning.

For those of us who live off the page, overconfidence remains a tricky thing. If we let our guard down for just a moment, as Holmes does here, it will get us.

Overconfidence causes blindness, and blindness in turn causes blunders. We become so enamored of our own skill that we discredit information that experience would otherwise tell us shouldn’t be discredited — even information as glaring as Watson telling us that our theories are “all surmise,” as he does in this case — and we proceed as before. We are blinded for a moment to everything we know about not theorizing before the facts, not getting ahead of ourselves, prying deeper and observing more carefully, and we get carried away by the simplicity of our intuition.

Overconfidence replaces dynamic, active investigation with passive assumptions about our ability or the seeming familiarity of our situation. It shifts our assessment of what leads to success from the conditional to the essential. I am skilled enough that I can beat the environment as easily as I have been doing. Everything is due to my ability, nothing due to the fact that the surroundings just so happened to provide a good background for my skill to shine. And so I will not adjust my behavior.

Holmes fails to consider the possibility of unknown actors in the drama or unknown elements in Mrs. Munro’s biography. He also does not consider the possibility of disguise (something of a blind spot for the detective. If you remember, he, with equal confidence, does not take it into account in the case of Silver Blaze; nor does he do so in “The Man with the Twisted Lip”). Had Holmes had the same benefit of rereading his own exploits as we do, he may have learned that he was prone to this type of error.

Many studies have shown this process in action. In one classic demonstration, clinical psychologists were asked to give confidence judgments on a personality profile. They were given a case report in four parts, based on an actual clinical case, and asked after each part to answer a series of questions about the patient’s personality, such as his behavioral patterns, interests, and typical reactions to life events. They were also asked to rate their confidence in their responses. With each section, background information about the case increased.

As the psychologists learned more, their confidence rose—but accuracy remained at a plateau. Indeed, all but two of the clinicians became overconfident (in other words, their confidence outweighed their accuracy), and while the mean level of confidence rose from 33 percent at the first stage to 53 percent by the last, the accuracy hovered at under 28 percent (where 20 percent was chance, given the question setup). Overconfidence is often directly connected to this kind of underperformance— and at times, to grave errors in judgment. (Imagine a clinician in a nonexperimental setting trusting too much in his however inaccurate judgment. Is he likely to seek a second opinion or advise his patient to do so?) Overconfident individuals trust too much in their own ability, dismiss too easily the influences that they cannot control, and underestimate others—all of which leads to them doing much worse than they otherwise would, be it blundering in solving a crime or missing a diagnosis.

The sequence can be observed over and over, even outside of experimental settings, when real money, careers, and personal outcomes are at stake. Overconfident traders have been shown to perform worse than their less confident peers. They trade more and suffer lower returns. Overconfident CEOs have been shown to overvalue their companies and delay IPOs, with negative effects. They are also more likely to conduct mergers in general, and unfavorable mergers in particular. Overconfident managers have been shown to hurt their firms’ returns. And overconfident detectives have been shown to blemish their otherwise pristine record through an excess of self-congratulation.

Something about success has a tendency to bring about an end to that very essential process of constant, never-ending education—unless the tendency is actively resisted, and then resisted yet again. There’s nothing quite like victory to cause us to stop questioning and challenging ourselves in the way that is essential for Holmesian thinking.

I would like to add one more trait that can lead CEOs, especially American ones, to take potentially false steps and make decisions based on somewhat misguided perceptions of themselves.

While this really has nothing to do with a fictionalize, genius 19th century detective, it does have something to do with a more gritty, somewhat fictionalized 1920’s era Chicago story-

THE UNTOUCHABLES!

Why wouldn’t a CEO feel confident with his decision making prowess when he/she (they) know that nothing will happen if they over-reach. Certainly no legal or criminal ramifications.

How many legal experts have investigated the Wall Street collapse and concluded that it was shocking that nobody was sent to jail over it.

How about Rupert Murdoch?

There are very specific laws in the US regarding the bribing of foreign governments and officials by American companies. Does anyone doubt that bribes were paid in the British phone hacking scandal?

Sure there were some ‘camera friendly’ arrests, but Rupert just put his head down, weather the storm and has since made off like a dingo that just stole a baby!

From where we sit, we see overconfidence, arrogance, overreaching and complacency. From where they sit- What’s the worst that could happen? They would be force to resign…with a massive severance package.

More psychobabble: When someone is suffering from a severe inferiority complex, the rest of the world seems to be populated with over-confident people.

There are thousands of reasons why bad decisions are made and “over confidence” probably ranks near the bottom of the list. Now, if you want to pose ignorance as a candidate, that one’s ripe. How about using ideology as a basis for decision-making? Then, there are set worldviews that taint our thinking. We could go on and on.

I believe balance in all things is most likely the secret to true happiness. Confidence is one of those things you need to balance.
The writer doesn’t say confidence in general is bad, but that OVER confidence is. Implying you are going over the natural reasonable level. Preferring confirmation bias over actual confirmation.

That being said you can actually just boil the whole thing down to arrogance, ignorance and maybe impatience. In this fast paced world it seems expedience is valued more then quality and accuracy, especially in the executive world.

These CEO’s the writer is speaking of may be making mistakes because they are trying to keep up with their markets. Preferring confirmation bias because it’s quicker and appears to make more motion and progress.